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Proposed reclassification of certain tax effects from AOCI

FINANCIAL REPORTING INSIGHTS
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January 30, 2018

Current generally accepted accounting principles (GAAP) require deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. This guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income (AOCI) were originally recognized in other comprehensive income (OCI) (rather than in net income). As a result of the Tax Cuts and Jobs Act (TCJA), some financial statement preparers have asserted that the tax effects of items within AOCI (referred to as stranded tax effects) do not reflect the appropriate tax rate.

For example, consider a situation in which an entity has a calendar year end and was in the 35 percent tax bracket prior to the TCJA and the 21 percent tax bracket after the TCJA. During 2016, the entity recognized a deferred tax asset of $35 related to a $100 item that was reflected in OCI, for a net effect on OCI of $65. In 2017, the gross amount of this item ($100) remained in AOCI. As a result of the TCJA, the entity reduces the deferred tax asset and recognizes tax expense from continuing operations of $14 (the difference between the original deferred tax asset of $35 and the reduced deferred tax asset of $21). Under current GAAP, the net amount included in AOCI related to the item would remain at $65, which would create a stranded debit in AOCI of $14. The FASB’s proposal to require the entity to reclassify $14 between AOCI and retained earnings would eliminate the stranded debit in AOCI.

If finalized, the proposed ASU would be effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption would be permitted. Entities that file or issue (or make available for issuance) financial statements prior to the release of the final ASU would not be allowed to make the reclassification in those financial statements. After the ASU is finalized, an entity would apply the proposed ASU retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. In the first interim and annual period of adoption of the ASU, entities would be required to disclose:

The nature and reason for the change in accounting principle

A description of the prior-period information that has been retrospectively adjusted

The effect of the change on affected financial statement line items

The proposed ASU is available for comment until February 2, 2018.The FASB understands the desire to issue the final ASU as quickly as possible, but it is likely that the final ASU will not be issued before early February.

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